Tuesday, October 13, 2009

Although a simple concept, trade--augmented by comparative advantage--shows us how our interactions with others can lead to a net benefit for all parties involved. However, when we consider the benefits of trade on the level of nations, we must consider more than the benefits of mere material gain. It is undeniably true that open and free trade allows nations to develop or at least increase their prosperity. It is also true, however, that each nation may not benefit to the same degree. A rising tide lifts all boats, but not equally. As nations develop through trade their relations (especially their power relations) change. Superpowers fade, new dragons rise. With this in mind, it is important to remember that while trade increases every nation's material well being, it does not preserve each nation's place. Thus, we are forced to weigh the benefits of relative position vs. absolute gains. It may be that in terms of security and the ability to project power to achieve national objectives, it is better to forgo an absolute increase in living standards, for the sake of maintaining a relative advantage over other nations. By trading with another nation we may, in effect, be advancing our own demise. While we will be better off materially, we may suffer in terms of prestige and relative power. These elements are not considered by Mr. Ricardo (to my knowledge), nor are they addressed in Mr. Roberts's tale; but it is important to remember that the complexities of human life (and its benefits and dangers) extend beyond the solely material world. The obvious benefits of free trade are real, but a nation must consider more than those benefits, it must also consider the associated costs; which although not necessarily economic, are essential to the lives and status of any people.

1 comment:

What do you mean when you say that "while trade increases every nation's material well being, it does not preserve each nation's place". Specifically, how are we measuring "place"? Real GDP? Per capita income? Military strength? Environmental quality? Influence in geo-political affairs? Happiness of the citizenry? An index that incorporates some or all of these variables? If opening to international trade and pursuing its comparative advantage allows nation A and nation B to both increase their total utility does it really matter if one country benefits more or less than the other so long as both are better off than before they opened to trade? Conversely is it worth having both countries be worse off just to maintain some arbitrary ordinal measure of relative rank?

This is why I'm not sure I can agree when you say "It may be that in terms of security and the ability to project power to achieve national objectives, it is better to forgo an absolute increase in living standards, for the sake of maintaining a relative advantage over other nations". This seems to implicitly assume that the interests of the national government - which in this case would intentionally be impoverishing its citizens - are the same as the interests of the citizenry themselves.

Think of it like an application of the theory of bureaucratic behavior applied to national governments. Rather than acting in the best interest of its citizens by allowing people to trade on the open international market the government restricts their freedom in order to maximize its own power and prestige, ostensibly in the name of national security or as you put it, to "project power to achieve national objectives". Perhaps the objectives of the government conflict with the best interests of the citizenry i.e. the government is interested in maintaining its relative position, or "place", of power at the expense of the well being of its people. By preventing economic agents from trading freely with other agents in neighboring countries the government thwarts the pursuit of comparative advantage, retards economic growth and harms the population.

This could also be looked at as a principal-agent problem because the interests of the government clearly run contrary to the interests of the citizenry. The government has an incentive to restrict trade, thus impoverishing not only its own citizens but also the citizens of other nations, in order to maintain its position as the dominant relative world power.